When renegotiation under incomplete contracts follows the outside option principle, hold-up may occur as the ex-post degree of competition increases on investor’s side. However, under this framework, asset specificity may play the counterintuitive role of an entry deterrence device, thus decreasing the probability of hold-up. Our result contrasts with standard literature in three respects: i) an equilibrium with overinvestment may emerge; ii) the 'intimidating effect' of overinvestment acts as an endogenous enforcement device; iii) a pervasive trade-off may emerge between ex-post efficient entry and ex-ante efficient specific investments.
Nicita, A., Vatiero, M. (2009). Incomplete Contracts, Irreversible Investments and Entry Deterrence. QUADERNI DEL DIPARTIMENTO DI ECONOMIA POLITICA, 566(566), 1-15.
Incomplete Contracts, Irreversible Investments and Entry Deterrence
NICITA, ANTONIO;VATIERO, MASSIMILIANO
2009-01-01
Abstract
When renegotiation under incomplete contracts follows the outside option principle, hold-up may occur as the ex-post degree of competition increases on investor’s side. However, under this framework, asset specificity may play the counterintuitive role of an entry deterrence device, thus decreasing the probability of hold-up. Our result contrasts with standard literature in three respects: i) an equilibrium with overinvestment may emerge; ii) the 'intimidating effect' of overinvestment acts as an endogenous enforcement device; iii) a pervasive trade-off may emerge between ex-post efficient entry and ex-ante efficient specific investments.File | Dimensione | Formato | |
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https://hdl.handle.net/11365/37242
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